AN ANALYSIS OF RETAIL SECTOR IN INDIA: WITH REFERENCE TO FDI

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1 International Journal of Retail Management & Research (IJRMR) ISSN Vol 2 Issue 2 June TJPRC Pvt. Ltd., AN ANALYSIS OF RETAIL SECTOR IN INDIA: WITH REFERENCE TO FDI DEEPAK SRIVASTAVA NIMS University, Rajasthan, India. ABSTRACT FDI plays an important role in the development process of a country. It has potential for making a contribution to the development through the transfer of financial resources, technology and innovative and improved management techniques along with raising productivity. Developing countries like India need substantial foreign inflows to achieve the required investment to accelerate economic growth and development. It can act as a catalyst for domestic industrial development. The Government of India was initially very apprehensive of the introduction of the Foreign Direct Investment in the Retail Sector in India. The unorganized retail sector as has been mentioned earlier occupies 98% of the retail sector and the rest 2% is contributed by the organized sector. Hence one reason why the government feared the surge of the Foreign Direct Investments in India was the displacement of labour. The unorganized retail sector contributes about 14% to the GDP and absorbs about 7% of our labour force. Hence the issue of displacement of labour consequent to FDI is of primal importance. There are different viewpoints on the impact of FDI in the retail sector in India, According to one viewpoint, the US evidence is empirical proof to the fact that FDI in the retail sector does not lead to any collapse in the existing employment opportunities. There are divergent views as well. According to the UK Competition Commission, there was mass scale job loss with entry of the hypermarkets brought about by FDI in the UK retail market. This paper highlight is Introduction & Definition of Retail, Division of Retail Industry, FDI Policy in India, FDI Policy with Regard to Retailing in India, Foreign Investor s Concern Regarding FDI in Single and Multi Brand Retail and Conclusions. KEY WORDS: FDI, labour, GDP, Competition, Retail sector INTRODUCTION India presents interesting case for the study of economy since India's economic growth over the past two decades has been one of the world's fastest growing countries. India has managed to reduce poverty, inequality, disparity and sustained the significance growth of GDP, however, it is largest abode of world's poor and it is far behind its main competitors in East Asia, particularly China. Moreover, a gulf is growing between India's richer and poorer states. Acceleration development requires improving the delivering of public services and concerted efforts to sustain the growth as well as to augment the productivity, efficiency and effectiveness in production systems and marketing structure. India has been

2 Deepak Srivastava 40 under foreign rule for a long period, and therefore, its administrators and political system is based on British model of development and governance, however, it has made progress in its various sectors of economy over the period. In this chapter, a review of historical background of Indian Economy and Indian Economic development is given to understand the dynamics of Indian Economy. India's commitment to planed economic development is a reflection of our society's determination to improve the economic conditions of population and an affirmation of the role of government in bringing about the outcome through a variety of social, economic and institutional measures. The Eleventh Five Year Plan begins in very favourable circumstances with the economy having grown at the rate of 7.7 per cent per year in the Tenth Plan Period. The Plan seeks to remedy of economic deficiencies by seeking to accelerate the pace of growth while also making it more inclusive. However, the challenge before the Eleventh Plan is to improve upon the historic growth performance and also ensure greater sustainability and inclusiveness so that the development process being unleashed has the widest possible spread of benefits (Eleventh Five Year Plan, 2008). DEFINITION OF RETAIL In 2004, The High Court of Delhi[1] defined the term retail as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale). A sale to the ultimate consumer. Thus, retailing can be said to be the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customers Retailing is the last link that connects the individual consumer with the manufacturing and distribution chain. A retailer is involved in the act of selling goods to the individual consumer at a margin of profit. The retail industry is mainly divided into:- 1) Organised Retailing 2) Unorganised Retailing ORGANISED Retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses. UNORGANISED retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.

3 41 An Analysis of Retail Sector in India: With Reference to FDI FDI POLICY IN INDIA FDI as defined in Dictionary of Economics (Graham Bannock et.al) is investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new (Greenfield) site. To put in simple words, FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy. Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provision of the Foreign Exchange Management Act (FEMA) The Reserve Bank of India ( RBI ) in this regard had issued a notification,[4] which contains the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, This notification has been amended from time to time. The Ministry of Commerce and Industry, Government of India is the nodal agency for motoring and reviewing the FDI policy on continued basis and changes in sectoral policy/ sectoral equity cap. The FDI policy is notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP). The foreign investors are free to invest in India, except few sectors/activities, where prior approval from the RBI or Foreign Investment Promotion Board ( FIPB ) would be required. QUESTION OF FDI IN RETAIL Supporters of FDI in retail trade talk of how ultimately the consumer is benefited by both price reductions and improved selection, brought about by the technology and know-how of foreign players in the market. This in turn can lead to greater output and domestic consumption. This could even be true. But nevertheless it cannot mitigate the important factor against FDI-driven 'modem retailing' in that it is labour displacing as it can only expand by destroying the traditional retail sector. Clearly till such time we are in a position to create jobs on a large scale in manufacturing, it would make eminent sense that any policy that results in the elimination of jobs in the unorganised retail sector should be kept on hold. Though many of the high decibel arguments in favour of FDI in the retail sector are not without some merit, it is not fully applicable to the retailing sector in India, or at least, not yet. This is because the primary task of government in India is still to provide livelihoods and not create so called efficiencies of scale by creating redundancies. As per present regulations, no FDI is permitted in retail trade in India. Allowing 49 per cent or 26 per cent FDI (which have been the proposed figures till date) will have immediate and dire consequences. Entry of foreign players now will most definitely disrupt the current balance of the economy rendering millions of small retailers jobless by closing the small window of opportunity available to them. It will be prudent to look into Press Note 4 of 2006 issued by DIPP and consolidated FDI Policy issued in October 2010 which provide the sector specific guidelines for FDI with regard to the conduct of trading activities.

4 Deepak Srivastava FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route. 2. FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of Single Brand products, subject to Press Note 3 (2006 Series) 3. FDI is not permitted in Multi Brand Retailing in India. FOREIGN INVESTOR S CONCERN REGARDING FDI POLICY IN INDIA For those brands which adopt the franchising route as a matter of policy, the current FDI Policy will not make any difference. They would have preferred that the Government liberalize rules for maximizing their royalty and franchise fees. They must still rely on innovative structuring of franchise arrangements to maximize their returns. Consumer durable majors such as LG and Samsung, which have exclusive franchisee owned stores, are unlikely to shift from the preferred route righ away. For those companies which choose to adopt the route of 51% partnership, they must tie up with a local partner. The key is finding a partner which is reliable and who can also teach a trick or two about the domestic market and the Indian consumer. Currently, the organized retail sector is dominated by the likes of large business groups which decided to diversify into retail to cash in on the boom in the sector corporate such as Tata through its brand Westside, RPG Group through Food world, Pantaloon of the Raheja Group and Shopper s Stop. Do foreign investors look to tie up with an existing retailer or look to others not necessarily in the business but looking to diversify, as many business groups are doing? An arrangement in the short to medium term may work wonders but what happens if the Government decides to further liberalize the regulations as it is currently contemplating? Will the foreign investor terminate the agreement with Indian partner and trade in market without him? Either way, the foreign investor must negotiate its joint venture agreements carefully, with an option for a buy-out of the Indian partner s share if and when regulations so permit. They must also be aware of the regulation which states that once a foreign company enters into a technical or financial collaboration with an Indian partner, it cannot enter into another joint venture with another Indian company or set up its own subsidiary in the same field without the first partner s consent if the joint venture agreement does not provide for a conflict of interest clause. In effect, it means that foreign brand owners must be extremely careful whom they choose as partners and the brand they introduce in India. The first brand could also be their last if they do not negotiate the strategic arrangement diligently. ORGANIZED RETAIL INVESTMENT Until a couple of years ago, the Indian organized retail market was either dominated by the apparel brands or regional retail chains. However, the scenario has changed dramatically. The sector has attracted not only the large Indian corporates but also received the attention of large global players. As per Technopak Advisers Pvt. Ltd. estimates, investments amounting to approximately US$ 35 billion are being planned for the next five years or so (Table 6.1). Of this, about 70 per cent is

5 43 An Analysis of Retail Sector in India: With Reference to FDI expected to come from top seven players including Reliance Industries, Aditya Birla Group, Bharti-Wal- Mart, Future Group and others. Also, it is estimated that about 40 per cent of the total investments will be contributed by foreign players including Wal-Mart, Metro, Auchan, Tesco and many others, signifying the importance that the international community is attaching to the Indian retail opportunity. In short, India is attempting to do in 10 years what took years in other major markets in the world and shall bypass many stages of evolution of modern retail. India is likely to see the emergence of several innovative India-specific retail business models and retail formats during the coming years. FDI IN SINGLE BRAND RETAIL The Government has not categorically defined the meaning of Single Brand anywhere neither in any of its circulars or nor any notifications. In single-brand retail, FDI up to 51 per cent is allowed, subject to Foreign Investment Promotion Board (FIPB) approval and subject to the conditions mentioned in following 1. Only single brand products would be sold (i.e., retail of goods of multi-brand even if produced by the same manufacturer would not be allowed) 2. Products should be sold under the same brand internationally, 3. single-brand product retail would only cover products which are branded during manufacturing and 4. Any addition to product categories to be sold under single-brand would require fresh approval from the government. FDI IN MULTI BRAND RETAIL The government has also not defined the term Multi Brand. FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple brands under one roof. In July 2010, Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce circulated a discussion paper on allowing FDI in multi-brand retail. The paper doesn t suggest any upper limit on FDI in multi-brand retail. If implemented, it would open the doors for global retail giants to enter and establish their footprints on the retail landscape of India. Opening up FDI in multi-brand retail will mean that global retailers including Wal-Mart, Carrefour and Tesco can open stores offering a range of household items and grocery directly to consumers in the same way as the ubiquitous kirana store. A BALANCED APPROACH TO RETAIL India is at the crossroads with regard to the retail sector. Several emerging market economies have gone ahead and reaped the benefits of modern retail. India is however a latecomer to organized retail

6 Deepak Srivastava 44 expansion and the picture still remains unclear as to its future direction. The study advocates a balanced approach to retail and suggests that the government plays a major role in shaping its future course. There is no doubt that traditional retail has been performing a vital function in the economy and is a significant source of employment. However, it suffers from huge inefficiencies as a result of which consumers do not get what they want, and farmers often get prices for their produce much below what is considered fair. In contrast, organized retail provides consumers with a wider choice of products, lower prices, and a pleasant shopping environment. It gives farmers a better alternative channel for selling their products at a better price. The competition from organized retail has affected the business of traditional retailers but they are making efforts to stay on. In their struggle to face this competition, they are handicapped by a lack of access to formal credit from commercial banks. As in other countries, government policy can and should play an important role in modernizing the unorganized sector and improve its competitiveness. On the other hand, a policy of protection of traditional retailers by restricting organized retail will harm the growth prospects of the country by foregoing the enormous benefits that are generated by organized retail. CONCLUSIONS The government has added an element of social benefit to its latest plan for calibrated opening of the multi-brand retail sector to foreign direct investment (FDI). Only those foreign retailers who first invest in the back-end supply chain and infrastructure would be allowed to set up multi brand retail outlets in the country. The idea is that the firms must have already created jobs for rural India before they venture into multi-brand retailing. It can be said that the advantages of allowing unrestrained FDI in the retail sector evidently outweigh the disadvantages attached to it and the same can be deduced from the examples of successful experiments in countries like Thailand and China where too the issue of allowing FDI in the retail sector was first met with incessant protests, but later turned out to be one of the most promising political and economical decisions of their governments and led not only to the commendable rise in the level of employment but also led to the enormous development of their country s GDP. Moreover, in the fierce battle between the advocators and antagonist of unrestrained FDI flows in the Indian retail sector, the interests of the consumers have been blatantly and utterly disregarded. Therefore, one of the arguments which inevitably needs to be considered and addressed while deliberating upon the captioned issue is the interests of consumers at large in relation to the interests of retailers. It is also pertinent to note here that it can be safely contended that with the possible advent of unrestrained FDI flows in retail market, the interests of the retailers constituting the unorganized retail sector will not be gravely undermined, since nobody can force a consumer to visit a mega shopping complex or a small retailer/sabji mandi. Consumers will shop in accordance with their utmost convenience, where ever they get the lowest price, max variety, and a good consumer experience.

7 45 An Analysis of Retail Sector in India: With Reference to FDI The Industrial policy 1991 had crafted a trajectory of change whereby every sectors of Indian economy at one point of time or the other would be embraced by liberalization, privatization and globalization.fdi in multi-brand retailing and lifting the current cap of 51% on single brand retail is in that sense a steady progression of that trajectory. But the government has by far cushioned the adverse impact of the change that has ensued in the wake of the implementation of Industrial Policy 1991 through safety nets and social safeguards. But the change that the movement of retailing sector into the FDI regime would bring about will require more involved and informed support from the government. One hopes that the government would stand up to its responsibility, because what is at stake is the stability of the vital pillars of the economy- retailing, agriculture, and manufacturing. In short, the socio economic equilibrium of the entire country. The real GDP is expected to grow at 8-10 per cent per annum in the next five years. As a result, the consuming class with annual household incomes above Rs. 90,000 is expected to rise from about 370 million in to 620 million in Consequently, the retail business in India is estimated to grow at 13 per cent annually from US$ 322 billion in to US$ 590 billion in The emergence of organized retail has been a recent phenomenon in the country, starting in the late 1990s. Its growth till was reasonably fast, at nearly 20 per cent per annum during the past three years. Unorganized retail also grew but at a slower pace of nearly 11 per cent per annum. There are signs that the growth of organized retail has accelerated in and is expected to gather further momentum during the coming years. This chapter highlights the following issues: (a) industrial estimate of future growth in total retail during the next five years; (b) relative share of organized vs. unorganized sectors; (c) the amount of additional investments that are envisaged in retail in the medium term; (d) estimates of employment generation; (e) geographical penetration of organized retail; (f) projection of real estate availability; and (h) the concentration in retail industry. REFERENCES BOOKS 1. Levy, Michel; and Weitz, Barton A. Retailing Management.New Delhi, Tata McGraw-Hill Publishing Company Limited, Mariton, John. Smart Things to Know about Brands and Branding.Mumbai, Indian Books Distributors Limited, ELECTRONIC RESOURCES 1. The Economic Times Knowledge Series :Retail ",New Delhi: Times Multimedia,2001(CD-ROM)

8 Deepak Srivastava "Changing Gears :Retailing in India",New Delhi: Times Multimedia,2003(CD-ROM) 3. "ET in The Classroom", Times Multimedia,2003(CD-ROM) INTERNET RESOURCES 1. Sept21, "Mall Management strategies"